After a rocky spring, we’ve had two consecutive months of gains in the S&P 500 index. Some pros are looking for a strong fall, and are hoping the Federal Reserve rides to the rescue with more “quantitative easing” at its September meeting.

But just when you thought it was safe to get back into the market, here comes Gary Shilling to throw ice water on your hopes and dreams. Shilling, a perennial Cassandra, said that when economists sift through all the data, they will say the next US recession began in the second quarter of 2012.

Earlier this year, Shilling predicted a global recession would occur in 2012. Now, it’s well underway in Europe, and he said it already has hit our shores. “I think the US is in recession,” he told me in a phone interview last week.

But here’s the good news, if you can call it that: He expects this to be a brief, mild, cyclical recession, not the kind we had in 2008-2009.

“I think the recession started in the second quarter, and will run about a year,” he said. He predicts a decline in GDP of 3.5% from peak to trough, “because I’m not looking for a financial crisis.”

Europe, however—which does have a fiscal crisis, a financial crisis, and everything in between—should show a 6.5% decline from peak to trough, about in line with what we both suffered in the Great Recession, he said.

Of course, a “mild” recession would be small consolation amid an 8.2% official unemployment rate in May, and many, many more people unofficially out of work.

It’s also not on most economists’ radar screens. The latest data, released last Friday, indicate GDP is still growing by a modest 1.5% per annum.

And David Wessel of The Wall Street Journal reported that “forecasters put the chances of a recession in the next 12 months at a reassuringly low 21%.” But GDP figures can be revised dramatically, and as Wessel wrote, “In August 2007, they put recession odds at 28%.”

Shilling is particularly troubled by retail sales data, which were down for three consecutive months—March, April, and May. “That has happened 27 times,” he explained. “In 25 of the 27 times, we were in a recession or within three months of the start of a recession.”

“Consumers had a mini-spending spree last year. That mini-spending spree has petered out and now they’ve cut back on spending.”

Also, manufacturing data, which had been strong, has weakened noticeably. The Institute for Supply Management’s June manufacturing report came in at 49.7, a big drop from May and in the contractionary zone below 50 for the first time since July 2009—an ominous sign.

But what’s most troubling to Shilling is the same wall of debt that towers over us like the Green Monster over Fenway Park.

He and the other Four Horsemen of the Apocalypse—Nouriel Roubini, John Mauldin, and Peter Schiff—have been warning about this for years, well before deleveraging became part of the common lexicon. In fact, Shilling recently wrote a book about it called The Age of Deleveraging.

All the consumer, housing, and government debt piled up over the last three decades will be a dead weight on the economy for five to seven years, Shilling believes, until we’re able to work it down to a more manageable level.

NEXT: No Green Shoots in Housing


And don’t get too excited about the recent green shoots in housing, either, he warned.

Sure, the rate of new-home construction in June rose to its highest level in four years, and the S&P/Case-Shiller 20-city composite index of housing prices rose 2.2% in June, with all 20 cities showing monthly gains.

But Shilling shrugs it off. “I think it’s a lull before the next Nor’easter,” he told me.

Problem is, the housing market has a lot of shadow inventory—underwater mortgages or homeowners that have avoided foreclosure by the skin of their teeth. “The reality is that foreclosures have virtually fallen in half from a 600,000 annual rate to 300,000,” he said.

But that may be temporary, because big banks have held off on foreclosures in the wake of the “robosigning” scandal. “With that out of the way, they’re probably going back to foreclose with a will,” he said.

“There are lots of seriously delinquent houses out there,” he continued. About 12% of residential mortgages are past due, and 31% are underwater (where the homeowner owes more than the house is worth).

So, he expects a new wave of foreclosures “within the next couple of quarters.” He’s sticking to his guns that home prices haven’t hit bottom; he expects the national average to drop another 20% before the housing depression ends.

Besides housing, weak employment reports and the dolorous headlines about Europe are making consumers and employers wary. Fear of another Congressional debacle around the so-called “fiscal cliff” isn’t helping either, though Shilling said he doesn’t expect the worst to happen there.

And though he expects GOP candidate Mitt Romney to win the presidential election—“I don’t think there’s any example in American history of a sitting president with high or rising unemployment getting re-elected,” he told me—that wouldn’t be a panacea, either.

The debt problem is so deep that it overshadows everything, and neither politicians nor central banks have the tools to deal with it effectively, he said.

Plus, we’re just about due for a recession, since it’s been 54 months—4 1/2 years—since the “cyclical peak” of December 2007, and three years since the Great Recession officially ended.

As usual, Shilling favors the “risk-off” trade—buy the US dollar, sell stocks and commodities, and buy or hold Treasuries, which he’s recommended since 1981 and have been great performers even though everybody has said they’re overvalued for years.

He expects yields on 30-year Treasury bonds to fall below 2% (they yielded 2.55% Thursday morning) and the ten-year note to yield 1%. (It yielded 1.48% Thursday.)

I see a US recession as a bigger risk than most economists believe it is, but I don’t think we’re quite there yet. I also don’t think that at their current low yields Treasuries offer good value, though I’ve been wrong about that before.

I’m also not sure I see the housing apocalypse that Shilling does. And I’ve written that stocks may actually have a few pretty good months ahead before succumbing to the inevitable bear market and recession.

Read Howard’s outlook for stocks through the election and beyond in

Still, Gary Shilling has earned a lot of street cred for his contrarian predictions and long track record of making money on Treasury bonds when even billionaire geniuses like Bill Gross were losing their shirts. So, I’m not willing to dismiss him out of hand, as too many people did for far too long.

Howard R. Gold is editor at large for and a columnist at MarketWatch. Follow him on Twitter @howardrgold and catch his political and economic commentary at